Can Law Manage Competitive Energy Markets?

Abstract:     
Where governments once favored state ownership or intrusive public utility regulation of the electricity and gas sector, they now seem willing to restructure regulated markets to try some form of competition. These first experiments with competition have not gone smoothly. Emerging energy markets have been marked by wholesale price volatility and by higher than expected prices in both the United States and Europe. The inability of prospective entrants to secure access to energy, or to delivery networks or both, has hampered the move toward a single European market in energy. These disappointing experiences with restructured energy markets have slowed the march toward markets in some places, and spawned frustration among the proponents of restructuring. Can restructuring work? More specifically, can law manage competitive energy markets so that they realize the promise of lower prices? This paper: (i) examines our initial, somewhat frustrating experiences with energy restructuring in both the United States and Europe, (ii) ascribes these frustrations, in part, to conflicts between the political and economic imperatives driving the restructuring process, and (iii) proposes a policy that does not paper over these conflicts and does not shield ratepayers (read: voters) from the fact that if we choose to seek the net benefits of market efficiency, we must also accept that net benefits mean benefits to some (or during some periods of time), and costs to others (or at other times). By confronting voters with this tradeoff, they ought to choose, through their elected representatives, either to accept the costs that come with market benefits, or to pay more for less price risk.

Keywords: energy, public utilities, restructuring, law, competition

JEL Classifications: K23, K21, L51

Accepted Paper Series